Arrow Electronics, Inc.

Hello, my name is Chris and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Arrow Electronics second quarter 2023 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star, then the number one on your telephone keypad. To withdraw your question, please press star one again. Thank you. Anthony Benchivenga, Vice President of Investor Relations. You may begin.

Thank you, Chris. I'd like to welcome everyone to the Arrow Electronics Second Quarter 2023 Earnings Conference Call. Joining me on the call today is our President and Chief Executive Officer, Sean Kerens, and our Chief Financial Officer, Raj Agrawal. During this call, we'll make forward-looking statements, including statements about our business outlook, strategies, and future financial results, which are based on our predictions and expectations as of today. Our actual results could differ materially due to a number of risks and uncertainties, including the risk factors described in our most recent 10-K and 10-Q filings with the SEC. We undertake no obligation to update publicly or revise any of the forward-looking statements as a result of new information or future events. As a reminder, some of the figures we will discuss on today's call are non-GAAP measures, which are not intended to be a substitute for GAAP results. We've reconciled these non-GAAP measures to the most directly comparable GAAP financial measures in this quarter's associated earnings release or Form 10-Q. You can access our earnings release at investor.arrow.com, along with the CFO commentary, the non-GAAP earnings reconciliation, and a replay of this call. We've also posted a slide presentation to accompany our prepared remarks and encourage you to reference these slides during this webcast. Following our prepared remarks today, we'll be available to take your questions, and now I will turn the call over to our President and CEO, Sean Cairns.

Thanks, Anthony, and thank you all for joining us. Today, I'd like to discuss our Q2 performance, provide some color regarding the market overall, and then close with a couple key thoughts as we think about the future. I'll then turn things over to Raj for more detail on our financials, as well as our outlook for Q3. In the second quarter, Arrow delivered sales and earnings per share within our expected ranges, consistent with a softer semiconductor market and a mixed information technology spending environment. Our global team continues to deepen relationships with our suppliers and increase engagements with customers, always with an emphasis on our value-added offerings and capabilities. As a result, we believe we're well-positioned to help our suppliers and customers navigate the current environment while positioning them for the many growth prospects that lie ahead. Having said that, we recognize we operate in a cyclical industry, and we're currently managing through an inventory correction. While I can't say for certain how long this will last, I can tell you that we've experienced these cycles before and fully understand what it takes to navigate them. We've always been a resilient business and see times like these as opportunities to strengthen the company for the future. To that end, we remain focused on our strategic priorities for creative growth and exercising prudent cost management and working capital discipline. In our global components business, there are a few dynamics currently at play. Component lead times are coming down. We've seen consistent improvement in average lead times for the past few quarters. While they're not quite back to pre-pandemic rates across the board, there has been substantial progress. At the same time, inventory levels throughout much of our customer base remain elevated. Consequently, while longer term electronics markets are expected to grow, The total addressable market for semiconductors, according to multiple sources, will clearly decline in 2023. While it may take time to work through existing inventories, we are encouraged that in general, and particularly in the West, end of market demand appears to be fairly steady. And in addition to improving lead times, we do see other indicators that speak to the underlying health of the business. In Q2, the pricing environment was largely stable. Our book-to-bill rates, though below parity, continued to hold steady. Our design-related activity grew substantially, and we're seeing continued adoption of our supply chain services offerings. Now, to take a look at each of our operating regions in a little more detail, in Europe, we saw a slight sequential decline in revenue, but that was better than normal seasonality, and we achieved robust year-over-year growth from a resilient industrial market along with strength, in automotive as well as aerospace and defense. In the Americas, we experienced a sequential and year-over-year decline in revenue. However, performance was stronger when adjusted for the further decline we experienced in the shortage market, which we now believe to have largely normalized. In addition, our focus on the market for interconnect, passive, and electromechanical devices is helping to offset a more challenging semiconductor operating environment. And in Asia, while we experienced continued softness in the Chinese market across both verticals, we did grow sequentially in the region with relative strength in sales from networking and communications infrastructure, along with modest improvement in parts of both the industrial and consumer segments. Profitability in our global components business remained above historic levels in the second quarter, Given a fairly stable pricing environment, the sequential operating margin decline was mainly a function of regional mix and a decline in volume along with the associated impact to operating leverage. We continue to believe our value-added offerings, including demand creation, design services, and supply chain management, are contributing to our structural margin health and remain committed to our long-term profitability outlook for this business. Now, switching gears to our enterprise computing solutions business. Sales for the second quarter were down year on year, largely a function of mix, as we saw relative strength in cloud, software, and services as customers migrate to IT solutions delivered on an as-a-service basis. Operating income grew modestly year on year and was in line with our expectations. The favorable mix contributed to year-over-year operating margin improvement. In Europe, Demand for cybersecurity solutions and other infrastructure software remain healthy. We were also pleased by the continued adoption of our hybrid cloud portfolio, which is enabled through our AeroSphere digital platform. And in the Americas, we saw relative strength in the public sector. We continue to focus on expanding our customer base in the mid-market and are seeing steady progress, even against the backdrop of softer enterprise IT demand. Now, before I hand things over to Raj, I'd like to offer just a couple thoughts as we look to the future. First, I want to be clear. I'm very excited about the key markets in which we operate and believe the long-term growth prospects are promising. Consider just a few key trends. The electrification and connectivity of everything. The accelerated adoption of new technologies such as electric vehicles. renewable energy, and artificial intelligence, just to name a few. And in the IT space, the growing relevance of hybrid and multi-cloud solutions all delivered on an as-a-service basis. And second, while the current market trajectories are challenging and a little bit uncertain, we're confident in our ability to generate cash in the near term, providing us the flexibility we need to serve our capital allocation priorities very effectively. And with that, I'll hand things over to Raj.